Member Article

The United States Sixth Circuit Court recently upheld a party’s contractual right to arbitration despite pre-lawsuit, informal letters suggesting that the parties litigate in court. In Borror Property Management, LLC v. Oro Karric North, LLC, the Sixth Circuit heard a dispute arising out of an Ohio federal trial court decision related to whether a party waived its arbitration right. Oro Karric North, LLC and its related entities (“Oro”) entered into a contract with Borror Property Management, LLC (“Borror”) for Borror to manage Oro’s residential apartments. The management contract included an arbitration provision stating, in essence, that disputes between them would be determined by arbitration unless they first resolved the dispute among themselves.

When a dispute arose between the parties, and Borror ceased to manage Oro’s properties, Oro asserted in a letter that Borror was in breach of contract. Oro stated that it planned “to proceed directly to litigation in either state or federal court” as the contract does “not limit litigation exclusively to arbitration.” Oro also asked Borror to notify it within 60 days if Borror preferred arbitration. Borror chose litigation. After receiving Oro’s letter, Borror filed a complaint in federal court asserting its own breach of contract claims. Oro then moved to compel arbitration, but the district court found that Oro had waived its contractual right to arbitration through its pre-litigation conduct.

Because the parties both assumed that the arbitration provision was valid and applicable, the question before the court became whether Oro waived its otherwise enforceable right to have the dispute heard by arbitration. As the Sixth Circuit noted, federal law looks favorably upon arbitration, and any waiver of that right “is not to be lightly inferred.” A party waives its arbitration right when (1) the party’s acts are “completely inconsistent” with its arbitration right, and (2) the party’s conduct is prejudicial to an opposing party (such as by significantly delaying one’s asserting the right to arbitrate).

The Sixth Circuit concluded that Oro did not waive its right to arbitration. The main dispute was whether Oro’s “litigation-threatening” correspondence amounted to conduct “completely inconsistent” with its arbitration right. But, as the court noted, pre-litigation letters serve a variety of purposes—from identifying a party’s concerns to foreshadowing litigation to articulating a path to settlement. As such, these letters are often more rhetorical art than legal science. Further, because a party’s true intentions in crafting such correspondence cannot be known, courts are reluctant to give those letters the same legal force as it might give a party’s representations in other settings. While Oro’s letter suggested that the ultimate dispute resolution path was Borror’s to choose, the court did not view the letter as “completely inconsistent” with Oro’s arbitration rights.

The Sixth Circuit also reasoned that concluding otherwise would make it much more difficult for parties to work out their differences short of litigation, which would, in turn, unnecessarily increase the load on the judicial system. Finally, even if it were to find Oro’s letter entirely inconsistent with its arbitration rights, Borror was not materially prejudiced by Oro’s actions. Typically, in this context, prejudice appears when one party spends substantial time or money in litigation before an arbitration right is invoked. Such was not the case here.

Having determined that Oro’s pre-lawsuit communications were neither inconsistent with its arbitration right nor prejudicial to Borror, the Sixth Circuit held that there was no waiver of Oro’s arbitration rights. This opinion supports the freedom to negotiate, posture, and act in one’s interest when faced with a dispute. While there is always some risk that pre-lawsuit or pre-arbitration conduct can result in a waiver, that is not the result preferred by courts. By enabling parties to speak freely prior to filing suit, courts are facilitating out-of-court resolutions of their differences and reducing the load on the judicial system.